Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on February 23, 1998 concluded the 1997 Article IV consultation1 with Belgium.

Background

Growth in 1997 was more rapid than anticipated, as strong external demand was
complemented by an acceleration of domestic spending. Private consumption picked up pace,
while corporate investment continued to expand. The recovery of household and business
confidence has owed much to firm macroeconomic policies, particularly the decisive reduction of
the fiscal deficit. Employment growth, however, remains weak. Recent economic performance
thus reflects success in reducing macroeconomic imbalances, but also persisting structural
problems.

Economic activity accelerated markedly in 1997, with GDP rising by 2.7
percent. While the recovery was export-led, domestic demand growth was stronger than
projected. Corporate investment continued to expand, reflecting capacity pressures, lower interest
rates, higher profits and strong foreign demand. Private consumption proved more robust than
projected earlier, growing by 2.1 percent: its acceleration over the past four years, despite little
growth in real disposable income, reflects a decline in precautionary saving as household
confidence has recovered. Wages are tracking below the norm for 1997-98 (a ceiling of some 3
percent at an annual rate), and inflation has been well below 2 percent. The unemployment rate
edged down slightly to some 12½ percent (9½ percent on an OECD standardized
basis), with some three-quarters of the total estimated to be structural—concentrated among
youths and the long-term jobless, and with striking local variations in unemployment. Some
shortages of high-skill labor are reported; but job creation remains weak, and mobility low. The
current account surplus rose to some 5 percent of GDP over the past decade, with gains in the
terms of trade and in investment income. The direct investment account, meanwhile, was in
surplus, partly as a result of inflows for fiscally-privileged corporate headquarter activities, and
foreign participations in the service sector; offsetting movements included outward portfolio
investment and public debt repayment.

Monetary policy has continued to be firmly geared to the deutsche mark
link. Long-term interest rates are now essentially at par with rates in Germany, and the short-term
differential is small. With a real effective exchange rate depreciation of some 7 percent over the
past two years, and a decline in interest rates, monetary conditions have eased notably. Market
interest rates rose in October (when official rates mirrored developments in Germany), but have
recently eased again.

Since 1992, fiscal policy has been directed firmly to deficit reduction,
despite an adverse cyclical setting, and the structural deficit has been cut by over 6 points of
GDP. The debt ratio has fallen by 13 points from a 1993 peak. However, this reflected mainly
lower interest costs and, until recently, higher taxes. The 1997 deficit goal was 2.9 percent of
GDP. Modest spending cuts were largely durable, but little decline in the primary spending ratio
was targeted; and civil service pension reform powers expired unused. Implementation was tight;
and with strong revenues and lower-than-projected interest rates, it proved possible to cut the
deficit to 2.1 percent of GDP— well below target. The 1998 budget aimed for an overall
deficit of 2.3 percent of GDP, but this was recently cut to 1.8 percent of GDP. Revenue measures
include an easing of social contrib-utions, with minor tax offsets. Primary spending is to rise by
close to 2 percent in real terms.

Labor market policies have tended to focus on the demand side, with pay
norms in force for much of the past 15 years, and targeted cuts in social
contributions—although the tax burden on labor income remains heavy. On the supply side,
problems remain: unemployment benefits taper down over time, but without a final cut-off, and
are not subject to strong job-search/training tests. Effective marginal tax rates on households are
very high in some cases when the unemployed find work. Restraints remain on agency hiring and
fixed-term work. Wage norms have safe-guarded competitiveness but compressed differentials.
Labor contracts are legally binding on all firms in a sector; and public support for early
retirement has in the past been widespread. In the product markets, with EU
policies, change is underway; but reforms have yet to reach full fruition; slow job creation
reflects in part remaining restrictions in services such as distribution.

The short-term outlook is for growth to continue at above potential, but
with some slowing as a result of weaker expansion in foreign markets. Although exports to Asia
are very modest, the main risk to the outlook lies in the impact of developments there on the
global environment, including Belgium’s competitiveness in third markets. On the
positive side, market interest rates have declined in recent months. GDP is projected by the staff
to grow by 2.6 percent in 1998. Although skill shortages may widen in the labor market, little
pressure on prices is expected.

Executive Board Assessment

Executive Directors commended the strong macroeconomic
and—especially—fiscal policies pursued by the authorities in recent years, which had
yielded a number of impressive achievements and brought Belgium to the threshold of EMU.
These policies had helped to lower risk premiums, trigger a recovery of investment, and
strengthen household confidence. As a result, growth was becoming more balanced, with strong
export growth complemented by rising domestic demand. At the same time, however, Directors
remained concerned about the continuing serious structural problems in the economy, in
particular the high level of unemployment and the high, albeit declining, ratio of public debt to
GDP. Directors therefore urged the authorities to take advantage of the current economic
recovery to address decisively underlying structural issues, in particular those relating to the
functioning of the labor and product markets, and the outlook for the public
finances—including the heavy tax burden on labor income. In this regard, Directors
underlined the crucial interlinkages recognized by the authorities, between labor market reforms
and fiscal adjustment, and noted therefore that the medium-term sustainability of the fiscal
position would be much improved by such reforms.

Directors noted that monetary policy, based on the deutsche mark link, had achieved high
credibility. This had contributed to the decline in inflation and interest rates in recent years, and
had helped to lay the basis for the present economic recovery. Directors saw the prospective
monetary union as offering opportunities to strengthen economic performance. However, they
stressed that this would depend on action to improve the flexibility of the economy, by creating
sufficient room for fiscal stabilizers to operate, and by imparting greater responsiveness to labor
and product markets.

Directors praised the firm implementation of fiscal policy in 1997, which had cut the deficit
to a level well below target, against the background of favorable economic trends. They noted,
however, that this performance reflected mainly interest rate reductions and revenue increases
rather than reductions in primary spending. For 1998, Directors welcomed the announcement that
the deficit objective had been revised from 2.3 percent of GDP to 1.8 percent of GDP.

Directors considered that fiscal consolidation remained a very high priority for 1998 and
beyond, and should be designed to ensure a convincing safety margin under the Stability and
Growth Pact, as well as a decisive cut in the debt burden before the emergence of demographic
pressures. Directors considered that, over the medium term, fiscal policy should also aim to
secure a durable cut in the tax burden. To achieve these twin goals, it would be crucial to secure a
slowdown in primary spending to well below the trend growth of GDP. This would require
further structural reforms in health care and pensions, as well as greater prioritization of
spending; moreover, several Directors stressed that it wasparticularly important for the regions
and communities to restrain spending firmly. For 1999, Directors called for a strong fiscal effort,
with a view to achieving structural balance over the medium term. In addition, there was need to
reach agreement on medium-term spending ceilings for each level of government, to create scope
for a significant cut in the tax burden on labor income, which should reduce total labor costs. In
this regard, Directors supported the authorities’ intention to reduce social security
contributions by employers, in a fiscally neutral manner, and urged that this be achieved as far as
possible by offsetting expenditure cuts.

There was a clear consensus that improving the prospects for employment creation was a
crucial priority for the period ahead, and one which could make a major long-run contribution to
strengthening economic performance and the sustainability of the public finances. Directors
noted that the unemployment problem was a complex issue, displaying large disparities among
regions and skill levels and reflecting a number of difficult problems in the labor market related
in particular to the benefit and tax structure, and limited wage differentiation among sectors and
firms. They therefore called for measures to liberalize labor market conditions. A key priority in
this regard was to improve the opportunities and incentives for the young to enter employment
and training. To that end, unemployment benefits should be made more dependent on genuine
efforts to seek work or training, which would require better coordination among the welfare,
employment, and training services. Recent steps to address tax traps and pare back early
retirement were welcomed, but further progress in these directions was viewed as crucial. Several
Directors expressed their doubts regarding suggestions to shorten working hours, and stated in
particular that, in any event, any such reduction should not result in an increase in labor costs.

Directors noted that the performance of the economy, including in job creation, would also
benefit from a strengthening of competition in product markets. European Union policies and
market pressures would be major forces for change, leading to further rationalization in such
sectors as telecommunications, power, transport, and banking. In this connection, Directors
stressed the need to deregulate market services, such as distribution, so that efficiency gains in
mature industries were coupled with vigorous job creation elsewhere.

With a strengthening of structural policies, Directors considered that the Belgian economy
stood to gain strongly from wider economic integration in Europe, including an enlargement of
the European Union—objectives supported by the authorities.

With regard to development assistance, Directors expressed concern about the recent impact
of budgetary restraint, while hoping that greater selectivity might mitigate the economic impact
of this; they encouraged the authorities to accord higher priority to protecting aid flows, with a
view to reversing the downward trend.

1Under Article IV of the IMF's Articles of Agreement,
the IMF holds bilateral discussions with members, usually every year. A staff team visits the
country, collects economic and financial information, and discusses with officials the country's
economic developments and policies. On return to headquarters, the staff prepares a report,
which forms the basis for discussion by the Executive Board. At the conclusion of the discussion,
the Managing Director, as Chairman of the Board, summarizes the views of directors, and this
summary is transmitted to the country's authorities. In this PIN, the main features of the Board's
discussion are described.